While Rivals Jockey For Market Share, Apple Bathes In Profits

Market share is probably the easiest and most often used point of comparison between competing products. It makes sense: If something has a large share of the market, it’s probably doing well. But that doesn’t always mean that it’s doing better than something with less market share, especially from a business perspective.

I bring this up because today brought some very interesting numbers from the research firm, Strategy Analytics. According to them, Apple has surpassed Nokia as the most profitable phone maker in the world. I’ll throw some numbers at you in a second to show why this is really incredible, but the key takeaway is that this is why, at the end of the day, Apple wins.

While the press and rivals obsess over market share, Apple quietly comes in and makes an insane amount of money. It’s the same in the computer industry. Small market share, huge amount of money. The most important thing for all of these are companies is the bottom line. Apple wins that battle.

According to the report, Apple made $1.6 billion in operating profit off of the iPhone in Q3. Nokia, meanwhile, made $1.1 billion. Let’s put this in perspective. Recent numbers suggest Nokia controls roughly 35% of the worldwide handset market. Apple? About 2.5%.

Not 25%. Two point five percent.

Since the launch of the iPhone in 2007, just about everyone has been clamoring for more variety in Apple’s offering. People wanted iPhone minis, they wanted CDMA iPhones, etc. But Apple stuck to its guns and has basically sold one phone, which it could manufacture efficiently, when rivals like Nokia are busy peddling dozens. Sure, there are a few variations on the iPhone (included memory, and now the 3G/3GS), but basically, it’s one phone that is pulling in hundreds of millions of dollars of more profit than the market leader.

To people who follow Apple closely, this should be absolutely no surprise. It’s the same thing it does in the computer industry. Despite having a much smaller market share than its rivals, it makes more money than most of them. The key, of course, is that Apple maintains its high profit margins, while the competitors shuffle to battle each other for market share.

That’s not to say that Apple doesn’t care about market share for either its computers or the iPhone, it undoubtedly does. But it’s a secondary goal to running a successful business. A business which is now absolutely thriving in an awful worldwide economic environment.

If Apple wanted to boost its computer market share, it could do so in a heartbeat simply by slashing into its margins and chopping hundreds of dollars off its machines. That’s why those “I’m A PC” shopping commercials this summer were humorous. They’re attacking Apple for not competing in segments (low cost PCs) that it has absolutely no desire to compete in. Would those commercials be effective if Apple chose to sell a $500 MacBook? No, because Lauren probably would have bought it (remember, her first stop was the Apple store).

Most consumers obviously shouldn’t like the idea that a company is purposely charging more for its product to keep its margins high. But Apple has a winning proposition for that because it builds machines of such high quality that to many users it seems like they should cost more than they actually do. Or as Apple COO Tim Cook put it in a earnings call over the summer, “Our goal is not to build the most computers. It’s to build the best.” When you do that, apparently you can keep your margins high and in turn, make insane profits.

The iPhone is a bit different because Apple has a partner that it has convinced to pay it an insane amount of money for each device sold and then subsidize the cost of it for consumers. Remember that when the iPhone first came out it was $600. That’s the price Apple clearly felt comfortable setting for it to maintain what it thought was a good margin.

That price, of course, was ridiculous (though, admittedly, myself and plenty of others paid it). A few months later, Apple realized this too, and slashed a couple hundred dollars off the price, thus slashing it margins. But then they figured out a better way. Previously, they had been getting a cut of every monthly AT&T iPhone contract. But with the iPhone 3G, Apple decided to give all that money to AT&T in exchange for one upfront payment, and the promise that AT&T would subsidize the cost of the phone down to $199 (and $299). Jackpot.

So basically, Apple is now making a huge margin on every iPhone sold, while AT&T more or less picks up the tab. (Don’t feel too bad for them, they still make plenty on those monthly contracts.) Now you see why Apple doesn’t mind that exclusive agreement even while us consumers bitch to no end? There are 1.6 billion reasons why they like that deal (okay, probably some smaller percentage of that, but still).

And because Apple makes all of this money, they have money to pour into making that next great product. A product that will likely be high quality — and sell with a high margin. Hopefully some of that $34 billion in cash (with no debt) is being poured into finalizing the tablet as we speak.

This influx of profit also allows Apple to take the plunge into new markets, like it did with the iPhone. Earlier today, blogger John Gruber recalled what former Palm CEO Ed Colligan said when he heard that computers makers like Apple could enter the phone market:

“We’ve learned and struggled for a few years here figuring out how to make a decent phone,” he said. “PC guys are not going to just figure this out. They’re not going to just walk in.”

Not only did they walk in, they walked in, changed the landscape, and have what now appears to be the best business model industry-wide.

Just as with the computer industry, while all its rivals were busy jockeying for market share, Apple secured the high ground and figured out the best way to bathe in profits.